Q.Continuing the facts of Rama Rao's consignment to Suresh (1,000 units at Rs 50 per unit, consignor's expenses Rs 2,500), suppose 50 units were completely destroyed in an accident while the goods were still in transit to Suresh, before he received any of them. The goods were insured, and the insurance company admitted a claim of Rs 2,000. Compute the value of the abnormal loss and show how the shortfall (if any) is dealt with.

The 50 units lost in transit are valued at their proportionate cost plus the proportionate share of the consignor's own expenses incurred up to the point of loss; only the consignor's expenses apply here, since the consignee's own expenses had not yet been incurred.

Since the accident occurred while the goods were still in transit, before Suresh incurred any expense of his own, only the consignor's own expenses (Rs 2,500 for the full 1,000 units) are relevant to valuing this loss — none of the consignee's expenses (which are not yet in the picture) enter the calculation.

Cost per unit = Rs 50,000 / 1,000 units = Rs 50.

Consignor's expense per unit = Rs 2,500 / 1,000 units = Rs 2.50.

Total value per unit (cost + proportionate direct expense) = Rs 52.50.

Value of abnormal loss of 50 units = 50 x Rs 52.50 = Rs 2,625.

This Rs 2,625 is credited out of the Consignment Account (removing it from the ordinary trading calculation) and debited to a separate Abnormal Loss Account.

The remaining 950 units (1,000 - 50 lost) now proceed to Suresh, and it is this reduced quantity of 950 units, bearing the remaining consignor's expense of Rs 2,500 - Rs 125 = Rs 2,375, that forms the base for all further calculations of sales and closing stock in Suresh's hands.

Cost per unit + proportionate consignor's expense per unit (since loss occurred before reaching consignee), multiplied by lost quantity; less insurance claim, balance to P&L.